138 Corporation Laws/Derivative suits

G.R. No. 172843 September 24, 2014

ALFREDO L. VILLAMOR, JR., Petitioner,

vs.
JOHN S. UMALE, in substitution of HERNANDO F. BALMORES, Respondent.

x-----------------------x

G.R. No. 172881

ODIVAL E. REYES, HANS M. PALMA and DOROTEO M. PANGILINAN, Petitioners,

vs.
HERNANDO F. BALMORES, Respondent.

DECISION

LEONEN, J.:

Before us is a petition for review on certiorari1 under Rule 45 of the Rules of Court, assailing the
decision2 of the Court of Appeals dated March 2, 2006 and its resolution3 dated May 29, 2006,
denying petitioners’ motions for reconsideration. The Court of Appeals placed Pasig Printing
Corporation (PPC) under receivership and appointed an interim management committee for the
corporation.4

MC Home Depot occupied a prime property (Rockland area) in Pasig. The property was part of the
area owned by Mid-Pasig Development Corporation (Mid-Pasig).5

On March 1, 2004, PPC obtained an option to lease portions of MidPasig’s property, including the
Rockland area.6

On November 11, 2004, PPC’s board of directors issued a resolution7 waiving all its rights, interests,
and participation in the option to lease contract in favor of the law firm of Atty. Alfredo Villamor, Jr.
(Villamor), petitioner in G.R. No. 172843. PPC received no consideration for this waiver in favor of
Villamor’s law firm.8

On November 22, 2004, PPC, represented by Villamor, entered into a memorandum of agreement
(MOA) with MC Home Depot.9 Under the MOA, MC Home Depot would continue to occupy the area
as PPC’s sublessee for four (4) years, renewable for another four (4) years, at a monthly rental of
₱4,500,000.00 plus goodwill of ₱18,000,000.00.10

In compliance with the terms of the MOA, MC Home Depot issued 20 post-dated checks
representing rentalpayments for one year and the goodwill money. The checks were given to
Villamor who did not turn these or the equivalent amount over to PPC, upon encashment.11

Hernando Balmores, respondent inG.R. No. 172843 and G.R. No. 172881 and a stockholder and
director of PPC,12wrote a letter addressed to PPC’s directors, petitioners inG.R. No. 172881, on April
4, 2005.13 He informed them that Villamor should bemade to deliver to PPC and account for MC
Home Depot’s checks or their equivalent value.14
Due to the alleged inaction of the directors, respondent Balmores filed with the Regional Trial Court
an intra-corporate controversy complaint under Rule 1, Section 1(a)(1) of the Interim Rules for Intra-
Corporate Controversies15 (Interim Rules) against petitioners for their alleged devices or schemes
amounting to fraud or misrepresentation "detrimental to the interest of the corporation and its
stockholders."16

Respondent Balmores alleged in his complaint that because of petitioners’ actions, PPC’s assets
were ". . . not only in imminent danger, but have actually been dissipated,lost, wasted and
destroyed."17

Respondent Balmores prayed that a receiver be appointed from his list of nominees.18 He also
prayed for petitioners’ prohibition from "selling, encumbering, transferring or disposing in any manner
any of [PPC’s] properties, including the MC Home [Depot] checks and/or their proceeds."19 He
prayed for the accounting and remittance to PPC of the MC Home Depot checks or their proceeds
and for the annulment of the board’s resolution waiving PPC’s rights in favor of Villamor’s law firm.20

Ruling of the Regional Trial Court

In its resolution21 dated June 15, 2005, the Regional Trial Court denied respondent Balmores’ prayer
for the appointment of a receiver or the creation of a management committee.The dispositive portion
reads:

WHEREFORE, premises considered the appointment of a Receiver and the creation of a

Management Committee applied for by plaintiff Hernando F. Balmores are, as they are hereby,
DENIED.22 (Emphasis in the original)

According to the trial court, PPC’s entitlement to the checks was doubtful. The resolution issued by
PPC’s board of directors, waiving its rights to the option to lease contract infavor of Villamor’s law
firm, must be accorded prima facie validity.23

The trial court also noted that there was a pending case filed by one Leonardo Umale against
Villamor, involving the same checks. Umale was also claiming ownership of the checks.24 This,
according to the trial court, weakened respondent Balmores’ claim that the checks were properties of
PPC.25

The trial court also found that there was "no clear and positive showing of dissipation, loss, wastage,
or destruction of [PPC’s] assets . . . [that was] prejudicial to the interestof the minority stockholders,
partieslitigants or the general public."26 The board’s failure to recover the disputed amounts was not
an indication of mismanagement resulting in the dissipation of assets.27

The trial court noted that PPC was earning substantial rental income from its other sub-lessees.28

The trial court added that the failure to implead PPCwas fatal. PPC should have been impleaded as
an indispensable party, without which, there would be no final determination of the action.29

Ruling of the Court of Appeals

Respondent Balmores filed with the Court of Appeals a petition for certiorari under Rule 65 of the
Rules of Court.30He assailed the decision of the trial court, which denied his "application for the
appointment of a [r]eceiver and the creation ofa [m]anagement [c]ommittee."31
In the decision promulgated on March 2, 2006, the Court of Appeals gave due course to respondent
Balmores’ petition. It reversed the trial court’s decision, and issued a new order placing PPC under
receivership and creating an interim management committee.32 The dispositive portion reads:

WHEREFORE, premises considered, the instant petition is hereby GRANTED and GIVEN DUE
COURSE and the June 15, 2005 Order/Resolution of the commercial court, the Regional Trial Court
of Pasig City, Branch 167, in S.E.C. Case No. 05-62, is hereby REVERSED and SET ASIDE and a
NEW ORDER is ISSUED that, during the pendency of the derivative suit, untiljudgment on the merits
is rendered by the commercial court, in order toprevent dissipation, loss, wastage or destruction of
the assets, in order to prevent paralization of business operations which may be prejudicial to the
interest of stockholders, parties-litigants or the general public, and in order to prevent violations of
the corporation laws: (1) Pasig Printing Corporation (PPC) is hereby placed under receivership
pursuant to the Rules Governing Intra-Corporate Controversies under R.A. No. 8799;(2) an Interim
Management Committee is hereby created for Pasig Printing Corporation (PPC) composed of
Andres Narvasa, Jr., Atty. Francis Gustilo and Ms Rosemarie Salvio-Leonida; (3) the interim
management committee is hereby directed to forthwith, during the pendency of the derivative suit
until judgment on the merits is rendered by the commercial court, to: (a) take over the business of
Pasig Printing Corporation (PPC), (b) take custody and control of all assets and properties owned
and possessed by Pasig Printing Corporation (PPC), (c) take the place of the management and the
board of directors of Pasig Printing Corporation (PPC), (d) preserve Pasig Printing Corporation’s
assets and properties, (e) stop and prevent any disposal, in any manner, of any of the properties of
Pasig Printing Corporation (PPC) including the MC Home Depot checks and/or their proceeds; and
(3) [sic] restore the status quo ante prevailing by directing respondents their associates and agents
to account and return to the Interim Management Committee for Pasig Printing Corporation (PPC) all
the money proceeds of the 20 MC Home Depot checks taken by them and to account and surrender
to the Interim Management Committee all subsequent MC Home Depot checks or
proceeds.33(Citation omitted)

The Court of Appeals characterizedthe assailed order/resolution of the trial court as an interlocutory
order that is not appealable.34 In reversing the trial court order/resolution, the Court of Appeals
considered the danger of dissipation, wastage, and loss of PPC’s assets if the review of the trial
court’s judgment would be delayed.35

The Court of Appeals ruled that the case filed by respondent Balmores with the trial court "[was] a
derivative suit because there were allegations of fraud or ultra vires acts . . . by [PPC’s directors]."36

According to the Court of Appeals,the trial court abandoned its duty to the stockholders in a
derivative suit when it refused to appoint a receiver or create a management committee, all during
the pendency of the proceedings. The assailed order ofthe trial court removed from the stockholders
their right, in an intra-corporate controversy, to be allowed the remedy of appointment of a
receiverduring the pendency of a derivative suit, leaving the corporation under the control of an
outsider and its assets prone to dissipation.37 The Court of Appeals also ruled that this amounts to
"despotic, capricious, or whimsicalexercise of judicial power"38 on the part of the trial court.

In justifying its decision to place PPCunder receivership and to create a management committee, the
Court of Appeals stated that the board’s waiver of PPC’s rights in favor ofVillamor’s law firm without
any consideration and its inaction on Villamor’s failure to turn over the proceeds of rental payments
to PPC warrant the creation of a management committee.39 The circumstances resulted in the
imminent danger of loss, waste, or dissipation of PPC’s assets.40

Petitioners filed separatemotions for reconsideration. Both motions were denied by the Court of
Appeals on May 29, 2006. The dispositive portion of the Court of Appeals’ resolution reads:
WHEREFORE, for lack of merit, respondents’ March 10, 2006 and March 20, 2006 Motions for
Reconsideration are hereby DENIED.41

Petitioners filed separatepetitions for review under Rule 45, raising the following threshold issues:

I. Whether the Court of Appeals correctly characterized respondent Balmores’ action as a

derivative suit

II. Whether the Court of Appeals properly placed PPC under receivership and created a
receiver or management committee

PPC’s directors argued that the Court of Appeals erred in characterizing respondent Balmores’ suit
as a derivative suit because of his failure to implead PPC as party in the case. Hence, the appellate
court did not acquire jurisdiction over the corporation, and the appointment of a receiver or
management committee is not valid.42

The directors further argued that the requirements for the appointment of a receiver or management
committee under Rule 943 of the Interim Rules were not satisfied. The directors pointed out that
respondent Balmores failed to prove that the assets of the corporation were in imminent danger of
being dissipated.44

According to the directors, assuming that a receiver or management committee may be appointed in
the case, it is the Regional Trial Court only and not the Court of Appeals that must appoint them.45

Meanwhile, Villamor argued that PPC’s entitlement to the checks or their proceeds was still in
dispute. In a separate civil case against Villamor, a certain Leonardo Umale was claiming ownership
of the checks.46

Villamor also argued that the Court of Appeals’ order to place PPC under receivership and to appoint
a management committee does not endanger PPC’s assets because the MC Home Depot checks
were not the only assets of PPC.47 Therefore, it would not affect the operation of PPC or result in its
paralysation.48

In his comment, respondent Balmores argued that Villamor’s and the directors’ petitions raise
questions of facts, which cannot be allowed in a petition for review under Rule 45.49

On the appointment of a receiver or management committee, respondent Balmores stated that the ".
. . very practice of waiving assets and income for no consideration can in factlead, not only to the
paralyzation of business, but to the complete loss or cessation of business of PPC[.] It is

precisely because of this fraudulent practice that a receiver/management committee must be

appointed to protect the assets of PPC from further fraudulent acts, devices and schemes."50

The petitions have merit.

Petition for review on

certiorari under Rule 45 was proper
First, we rule on the issue of whether petitioners properly filed a petition for review on certiorari
under Rule 45.

Respondent Balmores argued that the petition raises questions of fact.

Under Rule 45, only questionsof law may be raised.51 There is a question of law "when there is doubt
or controversy as to what the law is on a certain [set] of facts."52 The test is "whether the appellate
court can determine the issue raised without reviewing or evaluating the evidence."53 Meanwhile,
there is a question of fact when there is "doubt . . . as to the truth or falsehood of facts."54 The
question must involve the examination of probative value of the evidence presented.

In this case, petitioners raise issues on the correctness of the Court of Appeals’ conclusions.
Specifically, petitioners ask (1) whether respondent Balmores’ failure to implead PPC in his action
with the trial court was fatal; (2) whether the Court of Appeals correctly characterized respondent
Balmores’ action as a derivative suit; (3) whether the Court of Appeals’ appointment of a
management committee was proper; and (4) whether the Court of Appeals may exercise the power
to appoint a management committee.

These are questions of law that may be determined without looking into the evidence presented. The
question of whether the conclusion drawn by the Court of Appeals from a set of facts is correct is a
question of law, cognizable by this court.55

Petitioners, therefore, properly filed a petition for review under Rule 45.

II

Respondent Balmores’ action

in the trial court is not a derivative suit

A derivative suit is an action filed by stockholders to enforce a corporate action.56 It is an exception to

the general rule that the corporation’s power to sue57 is exercised only by the board of directors or
trustees.58

Individual stockholders may be allowed to sue on behalf of the corporation whenever the directors or
officers of the corporation refuse to sue to vindicate the rights of the corporation or are the ones to
be sued and are in control of the corporation.59 It is allowed when the "directors [or officers] are guilty
of breach of . . . trust, [and] not of mere error of judgment."60

In derivative suits, the real party in interest is the corporation, and the suing stockholder is a mere
nominal party.61

Thus, this court noted:

The Court has recognized that a stockholder’s right to institute a derivative suit is not based on any
express provision of the Corporation Code, or even the Securities Regulation Code, but is impliedly
recognized when the said laws make corporate directors or officers liable for damages suffered by
the corporation and its stockholders for violation of their fiduciary duties. In effect, the suit isan action
for specific performance of an obligation, owed by the corporation to the stockholders, to assist its
rights of action when the corporation has been put in default by the wrongful refusal of the directors
or management to adopt suitable measures for its protection.62
Rule 8, Section 1 of the Interim Rules of Procedure for Intra Corporate Controversies (Interim Rules)
provides the five (5) requisites63 for filing derivative suits:

SECTION 1. Derivative action. – A stockholder or member may bring an action in the name of a
corporation or association, as the case may be, provided, that:

(1) He was a stockholder or member at the time the acts or transactions subject of the action
occurred and at the time the action was filed;

(2) He exerted all reasonable efforts, and alleges the same with particularity in the complaint,
toexhaust all remedies available under the articles of incorporation, by-laws, laws or rules
governing the corporation or partnership to obtain the relief he desires;

(3) No appraisal rights are available for the act or acts complained of; and

(4) The suit is not a nuisance or harassment suit.

In case of nuisance or harassment suit, the court shall forthwith dismiss the case.

The fifth requisite for filing derivative suits, while not included in the enumeration, is implied in the
first paragraph of Rule 8, Section 1 of the Interim Rules: The action brought by the stockholder or
member must be "in the name of [the] corporation or association. . . ." This requirement has already
been settled in jurisprudence.

Thus, in Western Institute of Technology, Inc., et al. v. Salas, et al.,64 this court said that "[a]mong the
basic requirements for a derivative suit to prosper is that the minority shareholder who is suing for
and on behalf of the corporation must allege in his complaint before the proper forum that he is suing
on a derivative cause of action on behalf of the corporation and all other shareholders similarly
situated who wish to join [him]."65 This principle on derivative suits has been repeated in, among
other cases, Tam Wing Tak v. Hon. Makasiar and De Guia66 and in Chua v. Court of Appeals,67 which
was cited in Hi-Yield Realty, Incorporated v. Court of

Appeals.68

Moreover, it is important that the corporation be made a party to the case.69

This court explained in Asset Privatization Trust v. Court of Appeals70 why it is a condition sine qua
nonthat the corporation be impleaded as party in derivative suits. Thus:

Not only is the corporation an indispensible party, but it is also the present rule that it must be served
with process. The reason given is that the judgment must be made binding upon the corporation
inorder that the corporation may get the benefit of the suit and may not bring a subsequent suit
against the same defendants for the same cause of action. In other words the corporation must be
joined as party because it is its cause of action that is being litigated and because judgment must be
a res judicata against it.71

In the same case, this court enumerated the reasons for disallowing a direct individual suit.

The reasons given for not allowing direct individual suit are:
 (1) . . . "the universally recognized doctrine that a stockholder in a corporation has no title
legal or equitable to the corporate property; that both of these are in the corporation itself for
the benefit of the stockholders." Inother words, to allow shareholders to sue separately would
conflict with the separate corporate entity principle;

(2) . . . that the prior rights of the creditors may be prejudiced. Thus, our Supreme Court held
in the case of Evangelista v. Santos, that ‘the stockholders may not directly claim those
damages for themselves for that would result in the appropriation by, and the distribution
among them of part of the corporate assets before the dissolution of the corporation and the
liquidation of its debts and liabilities, something which cannot be legally donein view of
Section 16 of the Corporation Law. . .";

(3) the filing of such suits would conflict with the duty of the management to sue for the
protection of all concerned;

(4) it would produce wasteful multiplicity of suits; and

(5) it would involve confusion in ascertaining the effect of partial recovery by an individual on
the damages recoverable by the corporation for the same act.72

While it is true that the basis for allowing stockholders to file derivative suits on behalf of
corporations is based on equity, the above legal requisites for its filing must necessarily be complied
with for its institution.73

Respondent Balmores’ action in the trial court failed to satisfy all the requisites of a derivative suit.

Respondent Balmores failed to exhaust all available remedies to obtain the reliefs he prayed for.
Though he tried to communicate with PPC’s directors about the checks in Villamor’s possession
before he filed an action with the trial court, respondent Balmores was not able to show that this
comprised all the remedies available under the articles of incorporation, bylaws, laws, or rules
governing PPC.

An allegation that appraisal rights were not available for the acts complained of is another requisite
for filing derivative suits under Rule 8, Section 1(3) of the Interim Rules.

Section 81 of the Corporation Code provides the instances of appraisal right:

SEC. 81. Instances of appraisal right.— Any stockholder of a corporation shall have the right to
dissent and demand payment of the fair value of his shares in the following instances:

1. In case any amendment to the articles of incorporation has the effect of changing or
restricting the rights of any stockholders or class of shares, or of authorizing preferences in
any respect superior to those of outstanding shares of any class, or of extending or
shortening the term of corporate existence;

2. In case of sale, lease, exchange, transfer, mortgage, pledge or other disposition of all or
substantially all of the corporate property and assets as provided in this Code; and

3. In case of merger or consolidation.

Section 82 of the Corporation Codeprovides that the stockholder may exercise the right if he or she
voted against the proposed corporate action and if he made a written demand for payment on the
corporation within thirty (30) days after the date of voting.

Respondent Balmores complained aboutthe alleged inaction of PPC’s directors in his letter informing
themthat Villamor should be made to deliver to PPC and accountfor MC Home Depot’s checks or
their equivalent value. He alleged that these are devices or schemes amounting to fraud or
misrepresentation detrimental to the corporation’s and the stockholders’ interests. He also alleged
that the directors’ inaction placed PPC’s assets in imminent and/or actual dissipation, loss, wastage,
and destruction.

Granting that (a) respondent Balmores’ attempt to communicate with the other PPC directors already
comprised all the available remedies that he could have exhausted and (b) the corporation was
under full control of petitioners that exhaustion of remedies became impossible or futile,74 respondent
Balmores failed toallege that appraisal rights were not available for the acts complained of here.

Neither did respondent Balmores implead PPC as party in the case nor did he allege that he was
filing on behalf of the corporation.

The non-derivative character of respondent Balmores’ action may also be gleaned from his
allegations in the trial court complaint. In the complaint, he described the nature ofhis action as an
action under Rule 1, Section 1(a)(1) of the Interim Rules, and not an action under Rule 1, Section
1(a)(4) of the Interim Rules, which refers to derivative suits. Thus, respondent Balmores said:

1.1 This is an action under Section 1 (a) (1), Rule 1 of the Interim Rules of Procedure for Intra-
corporate Controversies, involving devices or schemes employed by, or acts of, the defendants as
board of directors, business associates and officers of Pasig Printing Corporation (PPC), amounting
to fraud or misrepresentation, which are detrimental to the interest of the plaintiff as stockholder of
PPC.75 (Emphasis supplied)

Rule 1, Section 1(a)(1) of the Interim Rules refers to acts of the board, associates, and officers,
amounting to fraud or misrepresentation, which may be detrimental to the interest of the
stockholders. This is different from a derivative suit.

While devices and schemes of the board of directors, business associates, or officers amounting to
fraud under Rule 1, Section 1(a)(1) of the Interim Rules are causes of a derivative suit, it is not
always the case that derivative suits are limited to such causes or that they are necessarily
derivative suits. Hence, they are separately enumerated in Rule 1, Section 1(a) of the Interim Rules:

SECTION 1. (a) Cases covered. – These Rules shall govern the procedure to be observed in civil
cases involving the following:

(1) Devices or schemes employed by, or any act of, the board of directors, business
associates, officers or partners, amounting to fraud or misrepresentation which may be
detrimental to the interest of the public and/or of the stockholders, partners, or members of
any corporation, partnership, or association;

(2) Controversies arising out of intra-corporate, partnership, or association relations, between

and among stockholders, members, or associates; and between, any or all of them and the
corporation, partnership, or association of which they are stockholders, members, or
associates, respectively;
 (3) Controversies in the election orappointment of directors, trustees, officers, or managers
ofcorporations, partnerships, or associations;

(4) Derivative suits;and

(5) Inspection of corporate books. (Emphasis supplied)

Stockholder/s’ suits based on fraudulent or wrongful acts of directors, associates, or officers may
also beindividual suits or class suits.

Individual suits are filed when the cause of action belongs to the individual stockholder personally,
and notto the stockholders as a group or to the corporation, e.g., denial of right to inspection and
denial of dividends to a stockholder.76 If the cause of action belongs to a group of stockholders, such
as when the rights violated belong to preferred stockholders, a class or representative suit may be
filed to protect the stockholders in the group.77

In this case, respondent Balmores filed an individual suit. His intent was very clear from his manner
of describing the nature of his action:

1.1 This is an action under Section 1 (a) (1), Rule 1 of the Interim Rules of Procedure for Intra-
corporate Controversies, involving devices or schemes employed by, or acts of, the defendants as
board of directors, business associates and officers of Pasig Printing Corporation (PPC),amounting
to fraud or misrepresentation, which are detrimental to the interest of the plaintiff as stockholder of
PPC.78

(Emphasis supplied)

His intent was also explicit from his prayer:

WHEREFORE, plaintiff respectfully prays that the Honorable Court –

....

2. After notice and due proceedings –

Declare that the acts of defendant Directorsin allowing defendant VILLAMOR to retain custody of the
MC Home checks and encash them upon maturity, as well as their refusal or failure to take any
action against defendant VILLAMOR to make him account and deliver the MC Home checks and/or
their proceeds to Pasig Printing Corporation are devices, schemes or acts amounting to fraud that
are detrimental to plaintiff’s interest as a stockholder of PPC;79 (Emphasis supplied)

Respondent Balmores did not bring the action for the benefit of the corporation. Instead, hewas
alleging that the acts of PPC’s directors, specifically the waiver of rights in favor of Villamor’s law firm
and their failure to take back the MC Home Depot checks from Villamor, were detrimental to his
individual interest as a stockholder. In filing an action, therefore, his intention was to vindicate his
individual interest and not PPC’s or a group of stockholders’.

The essence of a derivative suit is thatit must be filed on behalf of the corporation. This is because
the cause of action belongs, primarily, to the corporation. The stockholder who sues on behalf of a
corporation is merely a nominal party.
Respondent Balmores’ intent to file an individual suit removes it from the coverage of derivative
suits.

III

Respondent Balmores has no cause of action that would

entitle him to the reliefs sought

Corporations have a personality that is separate and distinct from their stockholders and directors. A
wrong tothe corporation does not necessarily create an individual cause of action. "A cause of action
is the act or omission by which a party violates the right of another."80 A cause of action must pertain
to complainant if he or she is to be entitled to the reliefs sought. Thus, in Cua v. Tan,81 this court
emphasized:

. . . where the acts complainedof constitute a wrong to the corporation itself, the cause of action
belongs to the corporation and not to the individual stockholder or member. Although in most every
case of wrong to the corporation, each stockholder is necessarily affected because the value of his
interest therein would beimpaired, this fact of itself is not sufficient to give him an individual cause of
action since the corporation is a person distinct and separate from him, and can and should itself
sue the wrongdoer. Otherwise, not only would the theory of separate entity be violated, but there
would be multiplicity of suits as well as a violation of the priority rights of creditors. Furthermore,
there is the difficulty of determining the amount of damages that should be paid to each individual
stockholder.82

In this case, respondent Balmores did not allege any cause of action that is personal to him. His
allegations are limited to the facts that PPC’s directors waived their rights to rental income in favor of
Villamor’s law firm without consideration and that they failed to take action when Villamor refused to
turn over the amounts to PPC. These are wrongsthat pertain to PPC. Therefore, the cause of action
belongs to PPC — not to respondent Balmores or any stockholders as individuals.

For this reason, respondent Balmoresis not entitled to the reliefs sought in the complaint. Only the
corporation, or arguably the stockholders as a group, is entitled to these reliefs, which should have
been sought in a proper derivative suit filed on behalf of the corporation.

PPC will not be bound by a decision granting the application for the appointment of a receiver or
management committee. Since it was not impleaded in the complaint, the courtsdid not acquire
jurisdiction over it. On this matter, it is an indispensable party, without which, no final determination
can be had.

Hence, it is not only respondent Balmores’ failure to implead PPC that is fatal to his action, as
petitioners point out. It is the fact that he alleged no cause of action that pertains personally to him
that disqualifies him from the reliefs he sought in his complaint.

On this basis alone, the Court of Appeals erred in giving due course to respondent Balmores’
petition for certiorari, reversing the trial court’s decision, and issuing a new order placing PPC under
receivership and creating an interim management committee.

IV

Appointment of a management committee was not proper

Assuming that respondent Balmores has an individual cause of action, the Court of Appeals still
erred in placing PPC under receivership and in creating and appointing a management committee.

A corporation may be placed under receivership, or management committees may be created to

preserveproperties involved in a suit and to protect the rights of the parties under the control and
supervision of the court.83Management committees and receivers are appointed when the
corporation is in imminent danger of "(1) [d]issipation, loss, wastage or destruction of assets or other
properties; and (2) [p]aralysation of its business operations that may be prejudicial to the interest of
the minority stockholders, parties-litigants, or the general public."84

Applicants for the appointment of a receiver or management committee need to establish the
confluence of these two requisites. This is because appointed receivers and management
1âwphi1

committees will immediately take over the management of the corporation and will have the
management powers specified in law.85 This may have a negative effect on the operations and affairs
of the corporation with third parties,86 as persons who are more familiar with its operations are
necessarily dislodged from their positions in favor of appointees who are strangers to the
corporation’s operations and affairs.

Thus, in Sy Chim v. Sy Siy Ho & Sons, Inc.,87 this court said:

. . . the creation and appointment of a management committee and a receiver is an extra ordinary
and drastic remedy to be exercised with care and caution; and only when the requirements under
the Interim Rules are shown. It is a drastic course for the benefit of the minority stockholders, the
parties-litigants or the general public are allowed only under pressing circumstances and, when
there is inadequacy, ineffectual or exhaustion of legal or other remedies . . . The powerof the court to
continue a business of a corporation . . . must be exercised with the greatest care and caution.
There should be a full consideration ofall the attendant facts, including the interest of all the parties
concerned.88

PPC waived its rights, without any consideration in favor of Villamor. The checks were already in
Villamor’s possession. Some of the checks may have already been encashed. This court takes
judicial notice that the goodwill money of ₱18,000,000.00 and the rental payments of ₱4,500,000.00
every month are not meager amounts only to be waived without any consideration. It is, therefore,
enough to constitute loss or dissipation of assets under the Interim Rules.

Respondent Balmores, however, failed to show that there was an imminent danger of paralysis of
PPC’s business operations. Apparently, PPC was earning substantial amounts from its other sub-
lessees. Respondent Balmores did not prove otherwise. He, therefore, failed to show at least one of
the requisites for appointment of a receiver or management committee.

The Court of Appeals had no

jurisdiction to appoint the receiver or management

committee

The Court of Appeals has no power to appoint a receiver or management committee. The Regional
Trial Court has original and exclusive jurisdiction89 to hear and decide intra-corporate
controversies,90 including incidents of such controversies.91 These incidents include applications for
the appointment of receivers or management committees.
"The receiver and members of the management committee . . . are considered officers of the court
and shall be under its control and supervision."92 They are required to report tothe court on the status
of the corporation within sixty (60) days from their appointment and every three (3) months after.93

When respondent Balmores filed his petition for certiorari with the Court of Appeals, there was still a
pending action in the trial court. No less than the Court of Appeals stated that it allowed respondent
Balmores’ petition under Rule 65 because the order or resolution in question was an interlocutory
one. This means that jurisdiction over the main case was still lodged with the trial court.

The court making the appointment controls and supervises the appointed receiver or management
committee. Thus, the Court of Appeals’ appointment of a management committee would result in an
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absurd scenario wherein while the main case is still pending before the trial court, the receiver or
management committee reports to the Court of Appeals.

WHEREFORE, the petitions are GRANTED. The decision of the Court of Appeals dated March 2,
2006 and its resolution dated May 29, 2006 are SET ASIDE.

SO ORDERED.